This is a simple question to pose, but the answer is a bit more complicated to give.  Part of the complication lies in the fact that in bankruptcy social security has two identities:  it is income, and it is an asset.  The rest of the complication arises because there is more than one chapter of the Bankruptcy Code under which individuals and married couples file.

I.          Social Security Income As An Asset

In any personal bankruptcy, one of the reporting requirements is found in 11 U.S.C. § 521(a)(1)(B)(i):  “The debtor shall—file—  . . . a schedule of assets . . .”  Social security payments are an asset, and become part of the bankruptcy estate that is created when the debtor files for bankruptcy protection.  (See 11 U.S.C. § 541(a)).

A.        Treatment In A Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, the Chapter 7 Trustee assigned to the case is empowered to seize bankruptcy estate assets and liquidate them for the benefit of creditors.  However, any of the debtor’s assets that are excluded from the estate under 11 U.S.C. § 541(b) are protected from the Chapter 7 Trustee’s depredations.  Unfortunately, social security payments are not excluded from the estate by § 541(b).

Nevertheless, any estate assets that the debtor can exempt are also protected from the clutches of the Chapter 7 Trustee.

The Bankruptcy Code has an exemption table which is found in 11 U.S.C. § 522.  However, the Bankruptcy Code — which is federal law — permits the states to use their own exemption tables.  California is unique among the states in that it has chosen to have two exemption tables for bankruptcy:  one for homeowners with equity, found in Cal. Civ. Proc. Code § 704, and the other for everyone else, found in Cal. Civ. Proc. Code  § 703.140.

The good news is that regardless of which California table the debtor uses, funds received under the social security act are 100% exempt.  Here are the relevant statutory provisions:

“The following exemptions may be elected . . . The debtor’s right to receive . . . social security benefit . . .”  Cal. Civ. Proc. Code § 703.140(b)(10)(A);


(b)  A deposit account is exempt without making a claim in the following amount: . . .

(2) Two thousand four hundred twenty-five dollars ($2,425) where one depositor is the designated payee of directly deposited social security payments . . .

(4)Three thousand six hundred fifty dollars ($3,650) where two or more depositors are the designated payees of directly deposited social security payments . . .

(c) The amount of a deposit account that exceeds the exemption provided in subdivision (b) is exempt to the extent that it consists of payments of public benefits or social security benefits.

Cal. Code Civ. Proc. § 704.080(b) and (c).

In sum, as an asset social security is completely protected in a Chapter 7 bankruptcy.

B.        Treatment In A Chapter 11 Or 13 Bankruptcy

In a Chapter 13 bankruptcy the debtor gets to keep all assets, whether they are exempt or nonexempt because the debtor will be paying the creditors something through the Chapter 13 plan.

Things are a bit more complicated under Chapter 11 because of something called the absolute priority rule.  I have already discussed the rule at length and will not repeat that long discussion here.  The gist is that depending on the judge the debtor may lose possessions.  However, even with such a judge the debtor will keep exempt assets, and as we have seen, social security is an exempt asset.

II.        Social Security As Income

A.        Treatment In A Chapter 7 Bankruptcy

Not everyone who wishes to file for bankruptcy protection under Chapter 7 is eligible for the relief.  One of the hurdles the debtor must overcome is a two-part test.  I have already discussed this test in several previous posts, but for convenience I’ll summarize it here.

The test as found in official Form 22A is the embodiment of 11 U.S.C. § 707(b)(2).  If a debtor passes the first part of the test we do not need to go any further.  Otherwise, we must apply the second part of the test.  In both parts of the test we start by calculating “Current Monthly Income ” (“CMI”).

CMI is defined in 11 U.S.C. § 101(10A) (with emphasis added):

The term “current monthly income”—

(A)  means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on—

(i)the last day of the calendar month immediately preceding the date of the commencement of the case . . . and

(B) includes any amount paid by any entity other than the debtor . . . on a regular basis for the household expenses of the debtor or the debtor’s dependents . . ., but excludes benefits received under the Social Security Act . . .

Thus, CMI is defined as the six-month arithmetic average of gross income from all sources other than social security (and a couple of other very rare types of income), received during the six calendar months immediately prior to the month in which we filing the bankruptcy papers.

In the first part of the test, we annualize CMI by multiplying by 12 to get Annualized CMI (“ACMI”), and then compare ACMI to the median income for a family of the debtor’s size in California.  If ACMI is less than or equal to the median income, then the debtor qualifies for Chapter 7 relief.  Otherwise, we must proceed with the second part of the test.

In the second part of the test, we return to CMI, but this time we do not annualize it.  Instead, we subtract:  (1) the six-month arithmetic average of taxes and social security that the debtor paid over the same six-month period, (2) the IRS standard monthly living expenses for a family of the debtor’s size, and (3) any additional living expenses that the debtor has that are not envisioned in the IRS standard expenses, but that the debtor can justify to the judge assigned to the case.  The result is “Disposable Monthly Income” (“DMI”).  The reason we perform this calculation is to answer a question that is predicated on the unreasonable assumption that the debtor does not have the debts that are to be discharged in the bankruptcy.  The questions is:  How much does the debtor have available, after paying taxes and social security, and covering reasonable living expenses, to pay creditors, perhaps in a Chapter 11 or 13 partial debt repayment plan?  If the answer is, nothing, then Chapter 7 is the appropriate form of relief.  To be a bit more precise, if DMI is less than $117, Chapter 7 is available, although it is safest to have a negative DMI.  Otherwise, the debtor must file under either Chapter 11 or Chapter 13.

The take-away here is that social security income does not play a role in Chapter 7 eligibility.

B.        Treatment In A Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy a debtor enters a multi-year debt repayment plan.  If the plan is less than 100% — i.e., it proposes to repay the general unsecured creditors less than 100% of what they are contractually owed — then the debtor must devote all disposable income to the plan.

One candidate for disposable income is DMI, the other is the so-called “I,J Difference” — the difference between net monthly income as reported in Schedule I and real life living expenses as reported in Schedule J of the bankruptcy papers.  The Supreme Court has addressed the question of which to use.  I have discussed it at great length, and will not rehash it here.  The reason I bring this up is because of a very recent Ninth Circuit case, Drummond v. Welsh, No. 12-60009 (9th Cir. March 25, 2013).

In Welsh the Chapter 13 vampire — oops, I mean the Chapter 13 Trustee — insisted that the debtors devote all of their social security income to plan payments.  The Ninth Circuit rejected the trustee’s position and held:

We conclude that Congress’s adoption of the BAPCPA forecloses a court’s consideration of a debtor’s Social Security income or a debtor’s payments to secured creditors as part of the inquiry into good faith under 11 U.S.C. § 1325(a).

In sum, social security income plays no role in a Chapter 13 plan.

C.        Treatment In A Chapter 11 Bankruptcy

The Welsh Court did not address the role of social security income in a Chapter 11 bankruptcy.  However, its reasoning in that case was based, in part, on the definition of CMI found in 11 U.S.C. § 101(10A) discussed above, and the application of 11 U.S.C. § 1325(b)’s discussion of DMI to determining the size of plan payments.

Therefore, since 11 U.S.C. § 101(10A)’s application is independent of chapter, and since 11 U.S.C. § 1129(a)(15) provides (with emphasis added):

In a case in which the debtor is an individual and in which the holder of an allowed unsecured claim objects to the confirmation of the plan—

(A) the value, as of the effective date of the plan, of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or

(B) the value of the property to be distributed under the plan is not less than the projected disposable income of the debtor (as defined in section 1325(b)(2)) to be received during the 5-year period beginning on the date that the first payment is due under the plan, or during the period for which the plan provides payments, whichever is longer.

it is reasonable to assume that the holding in Welsh can be used in a Chapter 11 case, mutatis mutandis.

In conclusion, if you are receiving social security income and need bankruptcy relief, you do not have to worry about the social security income.

If you are facing insurmountable debts, call a highly skilled bankruptcy attorney to get some real relief.